Regulatory changes push up costs for retirement fund members

About 80% of pension fund providers say compliance with the latest regulatory changes will result in additional costs for the members of a fund, according to research by PwC.

This is according to PwC’s latest look into the retirement industry entitled 2014 Retirement Fund Strategic Matters and Remuneration Survey, which contains the responses of 183 participants from small and large funds and represents an asset base of R592-billion.

Gert Kapp, retirement fund leader for PwC Southern Africa, said: “Much change has taken place in the South African retirement fund industry, but there is still plenty more to come. The national treasury has undertaken to release a set of draft regulations on default strategies by May 2014.”

In addition, the registrar of pension funds is preparing a number of draft regulatory instruments intended to implement new provisions in the Pension Funds Act relating to the training of trustees, “fit-and-proper” requirements for trustees and improving fund governance.

“It is not surprising that survey participants feel that regulatory cost and complexity is becoming excessive,” said Kapp.

Broad focus areasThe survey covers four broad focus areas: trustees’ activities and remuneration; trustees’ education; principal officers and their remuneration; and regulatory matters and retirement reform.
New areas investigated include questions about chairpersons and subcommittees as well as regulatory matters and retirement reform.

The three top areas of regulatory changes expected to have the most additional cost for members of funds were compliance with Regulation 28, which limits the extent to which retirement funds may invest in particular assets or in particular asset classes; retirement reform and legislative changes regarding taxation and preservation; and a number of changes to the format of financial statements.

About 69% of trustees say the South African retirement fund is appropriately regulated from the perspective of protecting members and 28% say it is not.

Despite concerns about cost, participants felt that the pace of change in the sector was too slow and that the proposed reform should be implemented without undue delay.

On the issues of trustees’ activities, the survey revealed that remuneration to trustees had increased from 45% to 50% overall in 2014.

Trustee remunerationThe main board appears to determine the level of trustee remuneration for standalone funds, according to 58% of the respondents, with the level of remuneration reviewed on an annual basis. Trustees’ remuneration is largely determined by the fund (72%). While most funds cater for trustee remuneration (55%), a fairly high proportion still does not (43%).

“Survey participants feel the sooner it becomes law that funds have to employ professional and independent trustees the better. In addition, trustee remuneration should be based on skill level, contribution and be benchmarked to industry norms taking into account the complexity of the fund and volume of business,” said Kapp.

The number of funds having a formal policy on trustee education has improved from 43% in 2012 to 63% in 2014. “This improvement is largely due to an increase from 60% to 73% among standalone funds,” said PwC partner in the retirement division Johannes Grové.

“The sheer scale of pension fund investments, coupled with the relevant economic, political and administrative risks, places an enormous responsibility on boards of trustees to govern these arrangements wisely.

“Not only do trustees have almost unlimited fiduciary responsibilities placed upon them by law, but they also have a moral obligation to act in the best interest of fund members.

“As expected, professional trustees are the most experienced and highly educated, with 94% having more than five years’ and 53% having more than 10 years’ experience,” said Grové.

Principal officersA significant percentage of principal officers (72%) have 10 or more years’ experience and it appears they are staying on until they retire. The majority of principal officers (84%) have a degree or postgraduate degree.

The median remuneration band across all funds was R350 000 to R600 000, but for large funds this was R600 000 to R1-million. For large funds, 29% were remunerated more than R1-million.

Survey participants feel that the role of the principal officer is underestimated and underpaid. Participants said the role is equivalent to running a company with R2-billion in assets with no staff but all the responsibilities.

PwC financial services leader for Africa Tom Winterboer said: “The retirement fund industry is undergoing profound changes. Trustees will need to assess and review their governance strategies and manage them in accordance with the new regulations and legislation.”

“Although many of the changes are positive, they tend to come at a cost in terms of additional complexity and record-keeping and reporting for fund members,” he said.